The impact of water ownership and water market trade strategy on Australian irrigators’ farm viability

Highlights

• Irrigators now use a diversity of water trade and ownership approaches in the MDB.

• Survey data assessed the relationship between water and farm viability.

• Actual volume of water received was more important than water ownership.

• Selling a higher volume of water allocations was associated with higher farm viability.

• Selling water entitlements had no significant impact on current farm viability.

Abstract

Reforms in the Murray-Darling Basin over the past several decades have led to well developed water entitlement and allocation markets. Irrigators now use a diversity of water trade and ownership approaches, ranging from owning relatively large amounts of water entitlements relative to their annual demand and selling when they have excess water, to owning smaller amounts (or less secure) water entitlements and relying heavily on water allocation markets to meet annual demands. Some irrigators do not trade at all. Although the benefits of water markets in reallocating water have been well established, there has been very little empirical analysis of the impact that water ownership and water market trade strategy has had on irrigators’ farm net incomes. This study uses irrigation industry survey data collected over a five year period from 2006/2007 to 2010/2011 across the Murray-Darling Basin to investigate the relationship that water trade strategy and water ownership have with farm viability (namely farm net income and rate of return). Although this is an interesting period to investigate these relationships, it must be noted that it was a period of extreme water scarcity and high water prices; hence any interpretation of results must take this into account. It was found that the actual volume of water received (which is a measure of water allocations for that region and size and security of water entitlements) is a more significant and positive influence on farm net income than water ownership per se, with this result most strongest in the horticulture industry. Water reliability is not as important in the broadacre industry as other industries. Selling water allocations was a significant and positive influence on farm net income and rate of return. Buying water entitlements was sometimes associated negatively with farm net income and rate of return in our time period, with no statistical significance found for the impact of selling water entitlements in the current year.

Introduction

Due to a persistent drought from 2002–2003 to 2009–2010, the River Murray in Australia endured record low flows and irrigators in the Murray-Darling Basin (MDB) faced considerable stress in dealing with reduced rainfall and water allocations, higher temperatures and a decline in some commodity prices (CSIRO, 2008, Connell and Grafton, 2011). The drought was broken in 2010 with flooding across the MDB. The economic viability of irrigated agriculture is influenced by how resilient irrigators are to water reductions. Resilience is influenced by the ability of farmers to adapt their production techniques, management skills, strategic choices (such as whether to buy or sell water), farm capital, natural capital, and community capital to deal with reduced access to water, terms of trade and a range of psychosocial influences (Kingwell et al., 2013, Wheeler et al., 2013).

In response to the historical over-allocation of water, fundamental water policy reforms have been introduced in Australia to deal with environmental impacts of water scarcity and the drought (Crase, 2008). The debate about the impact of government policy, the response of farmers and the role of the market are highly politicized in the MDB. The efficiency of water markets has been well publicized (e.g. Grafton et al., 2011, NWC, 2012), as has their ability to provide farmers with an opportunity to supplement farm income through trading in water allocations. In general, markets allow farmers to achieve greater allocative efficiency and provide incentives to enhance their technical efficiency. Allocative efficiency refers to water being allocated to where it generates the most value (income), while technical efficiency refers to the improvements in the efficient use of water through technology. A key question that has remained unanswered is whether participation in water markets makes irrigation farms more viable. In particular, if water is supposedly moving to higher valued uses, is it moving to more profitable farms within industries? Are farms that sell (or buy) water allocations and entitlements financially better off than those who do not? Is water ownership important, or is volume of water received a more important influence on farm net income? Similarly, is the size of water entitlements ownership of more importance than the size of land irrigated? Do different security types of water entitlement ownership matter? These questions have been rarely studied in the literature, and a fuller understanding of the empirical relationships between farm characteristics/water trading strategies and farm performance will allow greater informed and coherent policy decisions to be made within the MDB. We use unit-record level data from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) irrigation farm surveys from 2006–2007 to 2010–2011 to explore these questions.